ABX Weekly 24th October 2018 Market update

The risk averse mood in share markets continued, with the S&P500 down as much as 1.5% to the lowest since May, and European and Asian indices shedding between 1% and 3%. US 10yr treasury yield fell from 3.18% to 3.11%, the 2yr yield from 2.89% and 2.85%. Fed fund futures yields reduced the chance of another rate hike in December, from 85% to 75%.

Not trying to bear more bad news but property clearance rates in Australia are also on the decline. While the median prices have only slightly dropped there are concerns that with the banks lending less there could be a sudden and significant drop in prices.

Brewin’ with Nguyen

This week is not all bad news though, I’ve been getting a few enquires on what happens to bonds when interest rates move. And this is where the beauty of bonds come into play. Because they have a maturity date it is easy to calculate your return on your investment the day you purchase the bond.

Things that you know the day you purchase a bond:

  • Exactly what you get in coupons every 6 months
  • Your face value and the last coupon back at maturity
  • What you paid for the bond today

Knowing these things, you can work backwards to calculate your return on your investment when you hold it to maturity. When I quote a yield to maturity (YTM) of 5.50%, that is the return you will get on your investment every year.

Because all those things are fixed, the bonds aren’t subjected to the market fluctuation unless you must sell the bond prior to maturity. Whether interest rates go up or down, when you hold to maturity you get the same return!

This is what gives bonds the defensive asset class reputation and attracts investors that desire certainty on their income.

I have less certainty of where I put my keys every morning!

European Desk

The slide on the European markets is continuing and the major German stock market index, the Dax, is at its lowest point since 2017. The headlines out of Italy continue to keep investors on their toes and nobody is expecting any significant positive surprises from the upcoming economic indicators such as the German IFO survey or the ECB meeting on Thursday. Our traders on the Frankfurt Stock Exchange are reporting that they are seeing capital moving out of Italy into the Germany Bunds (which are the German Government bonds) and the yields for Italian 10-year bonds have more than doubled to 3.75% since May this year. In addition, major Rating Agency S&P will update the market on Friday if there are downgrading Italy’s debt rating.

ABX Colour

For more certainty in your life, speak to an advisor on +61 2 8076 9343 or visit our website https://www.bondexchange.com.au/ now!

Follow Us @AusBondExchange

Check the crack teams insights hereABX weekly 24/10/2018

 

ABX weekly market insights

 

Australian Bond Exchange Pty. Ltd. (“ABX”) provides both general and specific financial product advice. This document and any information, advice or recommendation has been provided by ABX without taking account of your objectives, financial situation or needs. Because of this, you should before acting on any information, advice or recommendation from ABX consider the appropriateness of the information, advice or recommendation, having regard to your objectives, financial situation and needs. If this document, or any information, advice or recommendation, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure document relating to the product and consider the document before making any decision about whether to acquire the product. ABX, its directors, representatives, employees or related parties may have an interest in any companies or entities, or any financial product issued by companies and entities, and may earn revenue from the sale or purchase of any financial product, referred to in this document or in any information, advice or recommendation. Neither ABX, nor any of its directors, representatives, employees, or agents, make any representation or warranty as to the reliability, accuracy, or completeness, of this document or any information, advice or recommendation. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or any information, advice or recommendation. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a “wholesale client” as that term is defined in the Corporations Act 2001 (Cth). ABX strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. ABX does not make a market in the securities or products that may be referred to in this document.